Strategic Organization

http://soq.sagepub.com

The `problem' of creating and capturing value

Jackson A. Nickerson, Brian S. Silverman and Todd R. Zenger
Strategic Organization 2007; 5; 211
DOI: 10.1177/1476127007079969

The online version of this article can be found at:

http://soq.sagepub.com

Published by:

http://www.sagepublications.com

Additional services and information for Strategic Organization can be found at:

Email Alerts: http://soq.sagepub.com/cgi/alerts

Subscriptions: http://soq.sagepub.com/subscriptions

Reprints: http://www.sagepub.com/journalsReprints.nav

Permissions: http://www.sagepub.co.uk/journalsPermissions.nav

Citations http://soq.sagepub.com/cgi/content/refs/5/3/211

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 211

STRATEGIC ORGANIZATION Vol 5(3): 211–225

DOI: 10.1177/1476127007079969
Copyright ©2007 Sage Publications (Los Angeles, London, New Delhi and Singapore)
http://so.sagepub.com

The ‘problem’ of creating and

capturing value
Jackson A. Nickerson Washington University in St Louis, USA
Brian S. Silverman University of Toronto, Canada
Todd R. Zenger Washington University in St Louis, USA

Introduction

Although the strategy field encompasses myriad research interests, perhaps the
most frequently voiced motivating question has been: ‘What are the sources of
a firm’s sustainable competitive advantage?’ In recent years, this has been trans-
formed into ‘How can a firm create and capture value?’, which reflects the
understanding that competitive advantage stems from two distinct (albeit
related) activities: value creation and value capture. If we reflect on the field of
strategy today, however, little research seems directly focused on these broad,
fundamental questions.
Strategy research departs from these questions in two ways. First, although
strategy scholars pay lip service to the notion of value creation, the vast majority
of strategy research has focused on value capture and underemphasized the chal-
lenge of crafting organizations and strategies that continuously create value. In
lieu of systematic understanding, ‘luck’ is regarded as a primary source of value
creation in much of the literature. Second, the typical study in strategy focuses
on a ‘strategic tactic’ – a single input to the process of strategy development.
How should the firm manage its network of relationships? Where should the
firm locate activity X? How should the firm organize activity Y? In essence,
strategy research has moved away from the field’s foundational questions to
focus on tactical decisions to be made under definable circumstances.
Re-emphasizing the strategic question of value creation highlights the
unique and central role that organization plays in crafting strategy. If the object-
ive of the firm is to create or increase value, then effective strategy and organiza-
tion cannot merely entail establishing a competitive advantage (Porter, 1996),
but rather must entail a constant search for entirely new rent streams – in
essence, a steady stream of competitive advantages. Hence, strategic manage-
ment is as much about crafting an organization that can readily identify new
value opportunities (and build strategies to appropriate that value), as it is about

211

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 212

212 S T R AT E G I C O R G A N I Z AT I O N 5 ( 3 )

discovering a singular strategic position that delivers sustained competitive

advantage. Firms that are effective at creating value make their own luck, by
crafting strategies and organizations that provide paths for new value creation.
More precisely, value-creating firms relentlessly uncover ‘strategic problems’ to
solve, whether embedded with customers (or potential customers), with sup-
pliers or within their own firms. For us, this agenda of relentless and deliberate
value creation is the unique contribution of strategic organization.
In this essay, we hope to plant the seeds for a new approach to research in
strategic organization. Our agenda is three pronged. First, we propose that the
problem-solving perspective (PSP) offers a particularly effective lens for an
emphasis on value creation. The PSP takes elements of the ‘problem’ as the unit
of analysis for the study of strategic and organizational questions, and decom-
poses managerial challenges into problem identification, search for problem
solution and creation of strategies for appropriating returns accruing to the
solution. To the extent that problem identification overlaps with value creation,
the PSP can fruitfully guide research in this area. Second, we lay out our assess-
ment of the key theoretical elements necessary to understand problem identifi-
cation. The primary requirement is that strategy scholars pay more heed to
processes that enable actors to deliberately find new sources of value instead of
relying on luck to do so. Central to the perspective is recognition of organiza-
tional processes that overcome biases – cognitive, motivational and informa-
tional – that contaminate the finding of new sources of value. Third, we make
some initial steps at developing a research roadmap by categorizing various
problem identification processes and proposing guideposts for systematic
research on this question.
Identifying a problem occurs in ways other than the deliberate approach
described. For instance, serendipity can occur. Alternatively, some problems are
identified collectively through a process of social construction (Schneider,
1985). In other instances solutions may be in search of or may even create prob-
lems (Cohen et al., 1972). While we acknowledge these and other alternative
mechanisms for identifying problems, our focus is on the deliberate category
described in the following.
We first introduce our perspective on deliberate value creation, drawing on
the PSP. We focus primarily on problem identification because, similar to value
creation, it has been relatively underemphasized in the extant literature. We pro-
vide an overview of the importance of decision-making processes that underlie
problem identification as well as the link between problem identification and
rent generation. We next note commonalities between this approach and organ-
izational learning, elements of Austrian economics and dynamic capabilities,
but argue that the PSP lens offers a more comprehensive approach to value cre-
ation than the alternatives. Finally, we introduce a set of questions that could
give rise to a new research program to advance the study of value creation from
a strategic organization perspective.

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 213

N I C K E R S O N E T A L . : C R E AT I N G A N D C A P T U R I N G VA L U E 213

A problem-solving perspective on value creation

Deliberate value creation

The PSP (Nickerson and Zenger, 2004) shares the assumption of the know-
ledge-based view that the key managerial objective is to create valuable new
knowledge (Barney, 1984; Conner and Prahalad, 1996; Kogut and Zander,
1992; Teece et al., 1997; Wernerfelt, 1984). By creating new knowledge, firms
uncover new means to convert inputs into valued outputs (Arrow and Hahn,
1971; Nelson and Winter, 1982). Consequently, the manager’s organizational
task is to craft an organization that efficiently generates and protects knowledge
(Conner and Prahalad, 1996; Kogut and Zander, 1992; Madhok, 1996). The
manager, however, cannot specify a priori the knowledge she or he wishes to
obtain because, more often than not, this knowledge does not yet exist. What
the manager can instead do is identify valuable problems – those which, if suc-
cessfully solved, yield knowledge that will significantly improve the organiza-
tion’s performance. Once a problem is identified, the manager then organizes a
search for solutions that optimizes the likelihood, speed and cost with which
valuable solutions are discovered. Finally, the manager seeks to appropriate a
portion of the solution’s value. Central to the PSP is an attempt to understand
the characteristics of problems, and of organizational structures and policies,
that facilitate successful problem selection and solution. Specifically, the PSP
seeks to identify a discriminating alignment between organizational forms and
problem characteristics to optimally manage value creation and capture.
Focusing on value creation components of PSP, we first introduce the issues sur-
rounding problem-solving and then devote the rest of our effort to a discussion
of problem identification.
The key question for problem-solving is: how can managers organize an effi-
cient search for high-value solutions to an identified problem? The efficient
approach to solution search depends on the complexity or non-decomposability
of the problem, the extent to which non-decomposability generates knowledge-
formation hazards, and the efficacy of various governance mechanisms for
encouraging searches appropriate for the level of problem complexity. Some
problems can be solved through the combination of independent, modular
searches, and consequently require minimal organizational control. Other prob-
lems require knowledge sharing across actors as well as coordinated search; for
such problems, various forms or hierarchy are optimal to manage efficiently the
attendant knowledge-formation hazards.
The key question for problem identification is: how can managers organize a
search to identify and select a problem whose resolution can be expected to gener-
ate significant value? Although not yet fully formed, the PSP approach to problem
identification examines organizational characteristics that facilitate or impede
problem identification, with a strong focus on processes. It seeks to understand
how various processes affect the discovery of various kinds of problems. As we

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 214

214 S T R AT E G I C O R G A N I Z AT I O N 5 ( 3 )

describe later, in many instances organizational structures and their attendant

processes have profound implications for the identification of problems. Thus, we
choose problem search as an appropriate unit of analysis and study how and why
processes shape the width, depth and speed of the resulting stream of problems
discovered and identified.
Of course, deliberately identifying a problem involves forethought about
the firm’s ability to assemble knowledge sets to solve the problem and hence cre-
ate value, as well as its ability to capture value from the solution. Thus, man-
agers should not want to select problems for which they have little chance of
cost effectively discovering a solution or for which their firm has little chance of
capturing value. Problem choice therefore should be influenced by solution
search and value capture possibilities. However, since prior research in the PSP
has focused on the organization of knowledge for problem-solving (Nickerson
and Zenger, 2004; also see Macher, 2006), and much of the extant strategy lit-
erature focuses on issues of value capture, in the sections that follow we suppress
detailed discussion of these influences.

Problem identification: contexts and domains

Why is it so difficult to identify novel problems? Put differently, why can’t a

manager simply organize the search for a problem according to the same pre-
scription by which she or he organizes the search for a solution to an identified
problem? At first glance, the two search processes may appear quite similar.
However, searching for a novel question or identifying a novel problem can
entail far more uncertainty than searching for a solution. Searching for an
unknown solution to a formulated problem provides at least a benchmark
against which various solution attempts can be evaluated. In contrast, when
searching for a problem and its formulation there exists no analogous bench-
mark against which to evaluate alternative problem formulations. It is not sur-
prising, then, that Einstein and Infeld (1938: 92) claim that ‘The formulation
of a problem is often more essential than its solution. … To raise new questions,
new possibilities, to regard old questions from a new angle, requires creative
imagination and marks real advance in science.’
The nature of searching for a problem thus frequently resembles a search
for an ‘unknown unknown’. Using the metaphor of knowledge landscapes
(Hsieh et al., forthcoming; Nickerson and Zenger, 2004), solving a problem
involves searching on a largely unseen knowledge landscape while searching for
a potentially valuable problem involves searching for potentially valuable and
largely unseen landscapes.
Such uncertainty does not merely increase the amount of resources necessary
to search, but also qualitatively alters the type of effort required. In our view, it is
precisely in such unconstrained-search contexts that biases are likely to be par-
ticularly severe impediments – impediments that contaminate efforts to discover
and identify problems. These include the well-known biases of anchoring,

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 215

N I C K E R S O N E T A L . : C R E AT I N G A N D C A P T U R I N G VA L U E 215

perceptual bias, information distortion, dominance, groupthink, primacy, satis-

ficing and conflicts of interest, among others. Such biases, whether cognitive,
motivational or informational, if not counteracted, can contaminate problem
discovery and identification by narrowing, slowing and making shallow the
stream of problems found. Put in common business vernacular, these impedi-
ments may diminish the identification of growth opportunities and increase
competitive threats. If not counteracted, these biases hamper problem identifica-
tion processes and hinder if not halt the discovery of new problems.
Although our logic is not fully worked out, we envision that the salience of
impediments with respect to problem identification varies with the nature and
context of problems being sought. For instance, the search for value-creating
problems that involve a reduction in manufacturing cost occurs in a context in
which the type of problems sought may be more modular and local, on average,
thus requiring fewer but deeper knowledge sets for their solution. In such situ-
ations, anchoring, conflict of interest and dominance may represent the principal
biases contaminating and limiting search for value-creating problems because
these biases may be more likely to be present among individuals with deep but
differing knowledge sets that collectively are trying to identify problems. For
instance, one possibility is that in such a domain individuals with differing deep
knowledge sets are likely to possess different mental models along with strong
identities that lead to anchoring, conflicts of interest and the use of dominance
to identify problems. In other contexts in which the problems sought are novel
and, if solved, could lead to entrepreneurial opportunities or radical innov-
ations, perceptual bias, information distortion, groupthink, primacy and satisfic-
ing are likely to be the principal impediments that contaminate the search. We
imagine that the salience of these biases arises because individuals with broad
knowledge sets may not be able to fully comprehend deep information and
therefore distort it, happy to discover any problem and therefore latch onto the
first acceptable one. At this point, these categorizations are hypothetical – no
taxonomy of the relationship between the nature and context of problem iden-
tification domain and type of impediments that contaminate the search has yet
been fully fleshed out. Nonetheless, our reading of a variety of literatures
encourages us to believe that a taxonomy is within reach. In turn, such a tax-
onomy will support future research that comprehensively informs our under-
standing of problem identification.

Problem identification: processes

Just as particular contexts may be especially susceptible to particular biases, we

believe that particular biases may be especially remediable through the applica-
tion of particular processes. If so, then this suggests a motivating question for the
study of value creation in strategic management: What processes enable the iden-
tification and selection of problems that ultimately reveal value-creating solutions
for the firm? Put differently, when and under what conditions will specific

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 216

216 S T R AT E G I C O R G A N I Z AT I O N 5 ( 3 )

processes mitigate specific impediments to effective problem identification?

These questions are relatively new to strategy, although they have been raised in
other fields such as the study of creativity.
By processes, we mean individual, group, or organizational activities and
efforts that aid in discovering problems that, if solved, create value. Processes, by
definition, comprise a set of facts, circumstances or experiences that are
observed and described or that can be observed and described and are marked
by gradual changes through a series of states. This technical definition of process
highlights several important elements. The facts, circumstances or experiences
are, or can be, observed and described, which implies that they can be verified
and monitored by participants or observers. Observability suggests that most,
strictly cognitive processes, are not under consideration. Moreover, observability
of the process states implies that the process can be designed, evaluated and
improved upon – important features that can give rise to creating organizational
advantages. Second, a process involves a series of changes, which implies that
one step in a process is differentiated from another by some type of state
change. A series of changes may also have implications for the cost of reaching a
particular state – costs may vary depending on where in the process you start.1
From a behavioral standpoint, most organization theorists have not considered
how problems are discovered and chosen. For instance, the behavioral theory of the
firm (Cyert and March, 1963), which adopts a process-oriented perspective,
assumes the existence of a problem. Similarly, processes found in the literature on
organizational behavior such as nominal group technique, brainstorming, the
Delphi process and dialectic process all assume that the problem is a given and pro-
vide detailed processes about how groups search for and choose solutions. Processes
for discovering and choosing problems are much less studied. To advance the con-
versation, it may be useful to offer a few illustrations of broad types of processes for
identifying and choosing problems. In doing so, we segment processes for identify-
ing problems into two broad classifications: analytic and synthetic processes.

Analytic processes
An analytic process is a sequence of steps – what might also be described as a struc-
tured set of steps – that an individual or organization takes to produce stimuli help-
ful in identifying problems. For instance, the statistical quality control revolution
launched the discovery of numerous processes that stimulate the identification of
deviations or waste, uncover their root cause or causes, and search for solutions to
eliminate them. The quality revolution over the past 20 years has generated a var-
iety of such processes under a variety of labels, including statistical process control,
total quality, lean manufacturing, Six Sigma and quality function deployment.
Each describes a set of specific and detailed process steps through which organiza-
tions discover and identify problems to solve. We use the term analytic to describe
these processes because the process steps disassemble and decompose the value
chain to quantitatively evaluate each step. The net result is that analytic processes
identify problems that, if solved, incrementally reduce cost or enhance quality

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 217

N I C K E R S O N E T A L . : C R E AT I N G A N D C A P T U R I N G VA L U E 217

through variance or waste reduction in particular steps of value chain. To the extent
that analytic processes are outwardly focused on satisfying customers, the customer
preferences being considered are familiar and clearly defined. Thus, analytic
processes focus on reducing defects, lowering cost or increasing well-defined qual-
ity metrics. The typical result of analytic processes, therefore, is value creation
through incremental innovation of an existing business model. These processes
normally depend on an environment in which production is repeated, the produc-
tion process can be defined and characterized, and customers have experience with
the product or service. Obviously, these processes are useful – otherwise they would
not be so widely applied. However, these processes typically generate problems for
which solutions represent incremental advances within an established paradigm.
They typically rely on easily obtained metrics where ‘better’ is uncontroversial –
lower cost, fewer defects, etc. In some ways, analytic processes search on a landscape
to find a higher peak rather than searching for landscapes.
The degree to which analytic processes generate strategic rents is tightly
linked to the firm’s skill in identifying a steady stream of problems and then
rapidly generating valuable solutions. While identifying and solving a single
problem is unlikely to deliver strategic rents, strategic rents are likely to flow to
those firms that develop a sustained capability at problem identification and
problem-solving. For instance, it is undeniable that Toyota’s lean manufacturing
process enables it to earn strategic rents because no other assembler has been
able to match its sustained ability to continually identify and solve manufactur-
ing problems associated with reducing waste. Motorola, credited with first
implementing if not inventing Six Sigma processes, is claimed to have saved
more than US$17 billion in production costs by 2006. It is widely accepted
that General Electric generated competitive advantage in many of its business
units through its commitment to Six Sigma processes. The early development,
adoption and thorough execution of analytic processes have provided Toyota,
Motorola and GE with a stream of problems and solutions that have generated
enormous value for these firms. The inability of many of their competitors to
generate an equivalent stream of problems and solutions has contributed to sus-
taining their competitive advantages.
While some of these analytic processes are well known and have been trans-
ferred between firms, we believe that the theoretical micro-foundations of these
analytic processes remain understudied by strategy scholars. For instance, what
aspects of these processes enable firms to identify a stream of problems and
solutions? Why do some processes and their implementation lead to a superior
ability to create and capture value? Put differently, we can ask why aren’t problems
identified and chosen with similar frequency without these processes? One plaus-
ible explanation is that the cognitive and other biases mentioned earlier act
as important impediments. That is, biases such as anchoring, perceptual bias,
information distortion, dominance, groupthink, primacy, satisficing and conflicts
of interest, unless counteracted, inhibit the discovery and solution of problems.
If processes provide mechanisms for overcoming these biases then we need to

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 218

218 S T R AT E G I C O R G A N I Z AT I O N 5 ( 3 )

understand from an organizational point of view what kinds of processes and

when these processes enable a stream value creation and capture. We also need to
know from a strategic view how some firms’ implementations of these processes
generate a wider, faster, deeper stream of problems and solutions than competitors’
implementations. We know of little specific research that assesses alternative
processes for their bias-reducing benefits and the linkage between analytic
processes and strategy. The consideration of individual and group biases may be
even more relevant to our second class of processes: synthetic processes.

Synthetic processes
Our second classification we call synthetic processes. Similar to analytic processes,
synthetic processes represent sequences of steps that produce stimuli that can lead
to problem identification. We define synthetic processes differently from analytic
processes by suggesting that they generate inductive, exploratory synthesis in
identifying novel problems in contrast to the deductive approaches of analytic
processes. While analytic processes disassemble and decompose, synthetic processes
are designed to actively combine and integrate. Synthetic processes have much
more to do with asking novel and what might be called catalytic questions2 in
response to ambiguity, even creating ambiguity, than with relying on deviations
from repeated activities. Processes that focus on discovering novel customer
problems and that ultimately lead to the identification of entrepreneurial oppor-
tunities or radical innovations fall under this category.
An essential difference between analytic and synthetic processes is the
nature of stimuli that launch problem identification. For instance, whereas ana-
lytic processes commonly rely on deviations and waste from repeated activities
to stimulate the finding of problems, synthetic processes involve stimuli from
less structured environments. Entrepreneurs seeking new questions and man-
agers seeking new growth opportunities represent situations where individuals
are seeking stimuli for the identification of new problems. Alternatively, one
might differentiate synthetic from analytic processes by suggesting that the for-
mer seeks out interesting and catalytic questions where analytic processes gener-
ate questions through deviations generated by repeated activities either in the
firm or between the firm and its environment.
Another essential difference between analytic and synthetic processes involves
the choice of problem to solve. As noted earlier, analytic processes engage stimuli
from deviations and excess waste, and consequently tend to identify problems that
are well structured: eliminating a bottleneck, reducing work in process or reducing
output variability of a machine. Synthetic processes are less constrained and prob-
lem identification less certain and more ill-structured. Synthetic processes may gen-
erate a wide range of alternative problems, many of which are substitutes, while
others are complements, and still others are quite independent from one another.
In selecting problems managers must decide not only which questions represent
design challenges to create value but also which problems their organizations have
a reasonable likelihood of solving at a low enough cost to create and capture value.

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 219

N I C K E R S O N E T A L . : C R E AT I N G A N D C A P T U R I N G VA L U E 219

We view new business strategies as primarily shaped and created through these
synthetic processes. Such processes are much more likely to look outwardly toward
customers and explore the fundamental ‘problems’ customers face in their efforts to
create value. A key outcome of such processes is identifying which customer prob-
lems to solve. Or, perhaps after sorting through various customers’ problems and the
related opportunities, synthetic processes may help decide upon which customers to
focus. Alternatively, if internally focused, these synthetic processes may explore the
broad interconnection of activities within the firm and thereby identify systemic
‘problems’, which if solved, could generate significant breakthroughs in the value
created for customers or in the costs incurred in serving them.
While we are unaware of research on synthetic processes for problem iden-
tification with respect to organizations, a few synthetic processes have been
introduced into related literatures. For instance, the evolving literature on cre-
ativity suggests that creativity is hard work and commonly social and collabora-
tive; seldom do breakthrough innovations occur as a ‘burst of creativity from a
lone genius’ (Sawyer, 2006: 258). One such process encompasses four stages:
these are preparation, incubation, insight and verification (Sawyer, 2006: 59).
While some researchers suggest the creative process is not linear, others have
argued by analyzing sketches and notebooks leading up to the insight that each
innovation resulted from a connected, directed, rational process (Weisberg,
1986, 1993). A variety of processes for creativity have been identified and these
processes may provide an interesting and useful foundation for the development
of processes for problem identification in strategic management. We also might
think of the tools in strategic management such as industry analysis, capability
analysis or activity analysis as inputs to a synthetic process. While the tools of
strategic management are relatively well specified, the processes by which man-
agers discover new questions are much less studied.

Alternative approaches to value creation … and

why they fall short

The perspective described in the preceding section has obvious links to several
other literatures. Perhaps reflecting our own biases, we comment here on only a
few of these relationships, notably organizational learning, Austrian economics
and the entrepreneurship literature and dynamic capabilities.

Organizational learning

Our terminology of analytic and synthetic processes has obvious parallels with
the literature on exploration and exploitation and the study of organizational
learning. A significant topic in the organizational learning literature explores the
problem of balancing exploration and exploitation as exhibited in distinctions
made between refinement of an existing technology and the invention of a new

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 220

220 S T R AT E G I C O R G A N I Z AT I O N 5 ( 3 )

one (see March, 1991: 72). Analytical and synthetic processes do parallel
exploitation and exploration but with specific and important differences. Perhaps
the most significant difference is that the latter tend to focus on the tradeoff
between processes at the organizational level whereas the former focuses on the
identification and solving of specific problems. These different units of analysis
have important implication for the types of questions that are answered. Rather
than focusing on the balance between processes, which is a focus in the explor-
ation–exploitation literature without ever delving into the details of these, the
PSP’s objective is to explore in a deep and detailed way processes as mechanisms
for overcoming various individual and group biases. As such, we are interested in
discerning the full sets of alternative analytic or synthetic processes and when a
particular analytic or synthetic alternative might be the most efficacious.

Austrian economics and entrepreneurship

Much of the entrepreneurship literature resonates with, if not directly builds off
of, the Austrian Economics perspective (e.g. Roberts and Eisenhardt, 2003).
Austrian economists and entrepreneurship scholars assume that humans are ra-
tional but ignorant about unseen opportunities, which is consistent with the
notion of Knightian uncertainty. This literature claims that discovering these
unseen opportunities fundamentally involves alertness, as the entrepreneur
through alertness uncovers opportunities for arbitrage – opportunities where cer-
tain factors of production are under-priced. The PSP adopts this baseline model
of humans but recognizes crucial and additional dimensions not embedded in the
Austrian perspective. In our perspective we assume that humans are boundedly
rational and can suffer from a variety of biases. These assumptions give rise to our
discussion of process and organization as ways to overcome bias impediments to
problem identification, which are not relevant in the Austrian perspective.
Our perspective assumes that such synthetic processes can and do exist to
enable the identification of novel problems. The entrepreneurship literature,
particularly the Austrian perspective, also asserts the existence of processes of
opportunity recognition but does not yet offer rich descriptions or comparative
analyses of synthetic processes. Instead, this literature focuses on individual fac-
tors such as life experience, information search, social ties, absorptive capacity,
cognitive processes and a heavy dose of luck as the primary factors driving
opportunity discovery. In particular, the notion that successful entrepreneurs are
those whose synthetic processes and theories are superior is absent not only
from the strategic management literature but from other literatures as well.
The PSP also differs from Austrian economics in its unit of analysis and its
core terminology. Austrians assume the ‘opportunity’ is the unit of analysis where
the PSP distinguishes problem identification from problem-solving. Although
some may view the distinction as a semantic difference, we believe that an oppor-
tunity consists of a problem ultimately matched with a solution that creates value.
Processes are helpful in both identifying problems and guiding solution search,

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 221

N I C K E R S O N E T A L . : C R E AT I N G A N D C A P T U R I N G VA L U E 221

theory crafting and the exploration of new ‘means–ends’ combinations (Casson,

1982; Shane and Venkataraman, 2000). Therefore, any focus by us on problem
identification explicitly deals with only one half of the concept of opportunity dis-
cussed by Austrians and entrepreneurship scholars. Put differently, we think we
have a better chance of developing new insights by segmenting the search for new
means–ends combinations into two component processes – one for problem dis-
covery and identification and the other for problem-solving. Indeed, new research
in entrepreneurship is beginning to pursue this path. McMullen and Shepherd
(2006) introduce a new model of entrepreneurial action that is concerned with
issues of stimulus, motivation and knowledge.

Dynamic capabilities

The PSP shares with the dynamic capabilities perspective a focus on the process
by which firms continually create and sustain competitive advantage. Teece et al.
(1997) define dynamic capabilities as ‘the ability to integrate, build, and recon-
figure internal and external competencies to address rapidly-changing environ-
ments’. Thus, while the resource-based view focuses on the selection and analysis
of rather static resources, the dynamic capabilities literature emphasizes the
development and renewal of resources that deliver competitive advantage. In this
regard, the theory is more organizational in its focus than the resource-based
view, highlighting the ways in which firms create value through constant capabil-
ity development and redevelopment.
This dynamic capabilities perspective, however, offers little theory surrounding
the processes by which capabilities are formed, or around which capabilities are
most appropriate for the changing environment. Moreover, this perspective is
entirely reactive – firms assess changing environments and then develop capabilities
isomorphic to that environment. Within the PSP, while the environment certainly
plays an important role in shaping problem choice and solution search, managers
within the PSP are actively shaping their environments as they seek to create value
through their selection of problems and search for solutions. Moreover, this per-
spective aims to define the organizational attributes and processes that support the
successful selection of problems and search for solutions. That said, recent work by
Eisenhardt and colleagues bridges some of the distinction between dynamic cap-
abilities and the PSP, by incorporating a focus on the process as the unit of analysis
(Eisenhardt and Martin, 2000) and by proposing a relationship between process
structure and innovative performance (Brown and Eisenhardt, 1997).

Processes and strategy

For strategy scholars, studying the identification and development of analytic and
synthetic processes is important to the understanding of creating and capturing
value. To generate a stream of rents, a firm must develop processes that generate

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 222

222 S T R AT E G I C O R G A N I Z AT I O N 5 ( 3 )

problems (and solutions) faster, more frequently and of higher quality than their
competitors. Shaping the nature of this stream of problems is a vital competitive
concern and deserves a detailed micro-analytic understanding of underlying
mechanisms. Firms fundamentally compete based on the quality of the analytic
and synthetic processes in which they engage. More effective processes deliver
greater opportunities for and success in value creation and capture. If all firms
embed identical or equivalent processes within their organizations and implement
these processes with similar consistency and efficacy, then the likelihood of firms
identifying truly unique problems with truly unique solutions is compromised.
While two firms with identically efficacious processes may identify unique prob-
lems and solutions and deliver competitive advantage to each, these unique com-
petitive advantages are more likely to accompany firms with unique and more
developed processes, particularly synthetic processes. Of course, developing
unique synthetic processes may be more difficult than analytic processes given
that we know much less about the former. That said, a firm that successfully
builds effective synthetic processes may possess an unusually valuable and sustain-
able source of competitive advantages, in part because these processes are so poorly
understood and thus exceptionally difficult to copy.
We believe that in most cases, processes, whether analytic or synthetic, are
developed, introduced and managed by organizations as opposed to being
introduced across market interfaces. We further believe that by managing
processes, organizations craft strategies that create and, ultimately, capture
value. An effective strategically focused organization generates a steady stream of
competitive advantages. These advantages begin by first identifying a steady
stream of valuable problems. We argue that processes specific to a firm for iden-
tifying and choosing problems may be at the root of such effective strategy and
organization.

Implications for research in strategic organization

Our preliminary conclusion is that much opportunity exists in the literature on

strategic organization to better explore and understand value creation. Based on
the problem-solving perspective of value creation articulated herein, we identify
several voids in the strategic organization literature and offer our thoughts on
how to advance the field. To do so, in this essay we have suppressed discussion
of governance-related issues to emphasize the need to develop a theoretical
apparatus for identifying, comparing and evaluating processes.
Perhaps the most obvious opportunity arises from the fact that few strategy
scholars have taken seriously the problem identification process (as opposed to
opportunity recognition) as the unit of analysis for studying value creation.
Moreover, few have conceptualized studying processes as mechanisms for at-
tenuating problem identification impediments. Most studies of process in strategic
management and organization investigate how problems are solved rather than

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 223

N I C K E R S O N E T A L . : C R E AT I N G A N D C A P T U R I N G VA L U E 223

how they are identified and chosen, or study processes from a perspective of
organizational change. Those areas of management and operations that do offer
descriptions of highly structured problem-identification processes, such as lean
manufacturing and Six Sigma, provide neither a behavioral theory about when
and why these processes are beneficial nor a theoretical apparatus for assessing
the benefits of alternative processes. If such processes create value (and ul-
timately lead to the capture of value), why do they do so? What problem iden-
tification impediments do these processes overcome? How can we identify and
assess new processes that might be sources of strategic advantage? From a per-
spective of creating and capturing value, can firms develop problem identifica-
tion processes that provide them with unique streams of problems – and rents?
If so, how can these streams be made wider, faster, deeper?
If alternative analytic or synthetic processes exist, as we strongly suspect,
then what are the alternatives and when will alternative processes be superior in
various contexts? What attributes of the problem identification contexts are rele-
vant for choosing among alternative processes? What contextual attributes
influence the design and choice of processes for problem identification?
Even though we recommend problem identification search as a useful unit
of analysis, the desire of bundling multiple processes within an organization – say
an analytic process as well as a synthetic process – raises additional questions
about organization. Can a single organization sustain multiple types of processes
within the same organization? Under what conditions are processes comple-
ments vs substitutes? Does the adoption of one process impair the adoption and
application of another process? Can a single organization sustain multiple and
different analytic processes or synthetic processes? If so, under what conditions
will processes conflict as mechanisms? The answers to these questions may have
broad implications not only for the study of creating and capturing value but
also may have a profound influence on the practice of management. Moreover,
answering these questions may allow scholars to better integrate various perspec-
tives such as organizational learning, dynamic capabilities and transaction cost
economics into a more comprehensive science of organization.

Acknowledgements

The authors wish to thank Markus Baer, Stuart Bunderson and Kurt Dirks for their helpful con-
versations.

Notes

1 We generally view processes as a specific class of routines. The key differentiator between
processes and routines, more generally, is that the former are specific, observable and, there-
fore, improvable.
2 We thank Jeff Dyer for introducing us to the terminology of catalytic questions.

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 224

224 S T R AT E G I C O R G A N I Z AT I O N 5 ( 3 )

References

Arrow, K. J. and Hahn, F. H. (1971) General Competitive Analysis. San Francisco: Holden-Day.
Barney, J. B. (1984) ‘Strategic Factor Markets: Expectations, Luck, and Business Strategy’,
Management Science 32(10): 1231–41.
Brown, S. L. and Eisenhardt, K. M. (1997) ‘The Art of Continuous Change: Linking
Complexity Theory and Time-Paced Evolution in Relentlessly Shifting Organizations’,
Administrative Science Quarterly 42(1): 1–34.
Casson, M. (1982) The Entrepreneur. Totawa, NJ: Barnes and Noble Books.
Cohen, M. D., March, J. G. and Olsen, J. P. (1972) ‘A Garbage Can Model of Organizational
Choice’, Administrative Science Quarterly 17(1): 1–25.
Conner, K. R. and Prahalad, C. K. (1996) ‘A Resource-Based Theory of the Firm: Knowledge
versus Opportunism’, Organization Science 7(5): 477–501.
Cyert, R. M. and March, J. G. (1963) A Behavioral Theory of the Firm. Englewood Cliffs, NJ:
Prentice-Hall.
Einstein, A. and Infeld, L. (1938) The Evolution of Physics. New York: Simon and Shuster.
Eisenhardt, K. M. and Martin, J. A. (2000) ‘Dynamic Capabilities: What Are They?’, Strategic
Management Journal 12(10/11): 1105–21.
Hsieh, C., Nickerson, J. A. and Zenger, T. R. (forthcoming) ‘Opportunity Discovery, Problem
Solving, and the Entrepreneurial Theory of the Firm’, Journal of Management Studies.
Kogut, B. and Zander, U. (1992) ‘Knowledge of the Firm, Combinative Capabilities and the
Replication of Technology’, Organization Science 3(August): 383–97.
McMullen, J. S. and Shepherd, D. A. (2006) ‘Entrepreneurial Action and the Role of Uncertainty
in the Theory of the Entrepreneur’, Academy of Management Review 31(1): 132–52.
Macher, J. T. (2006) ‘Technological Development and the Boundaries of the Firm: A Knowledge-
Based Examination in Semiconductor Manufacturing’, Management Science 52(6):
826–43.
Madhok, A. (1996) ‘The Organization of Economic Activity: Transaction Costs, Firm
Capabilities, and the Nature of Governance’, Organization Science 7(5): 577–90.
March, J. G. (1991) ‘Exploration and Exploitation in Organizational Learning’, Organization
Science 2: 71–87.
Nelson, R. R. and Winter, S. G. (1982) An Evolutionary Theory of Economic Change. Cambridge,
MA: Belknap Press.
Nickerson, J. and Zenger, T. (2004) ‘A Knowledge-Based Theory of Governance Choice’,
Organization Science 15(6): 617–32.
Porter, M. (1996) ‘What is Strategy’, Harvard Business Review November/December.
Roberts, P. W. and Eisenhardt, K. M. (2003) ‘Austrian Insights on Strategic Organization: From
Market Insights to Implications for Firms’, Strategic Organization 8(1): 345–52.
Sawyer, K. (2006) Explaining Creativity. New York: Oxford University Press.
Shane, S. and Venkataraman, S. (2000) ‘The Promise of Entrepreneurship as a Field of Research’,
Academy of Management Review 26(1): 13–27.
Schneider, J. W. (1985) ‘Social Problems Theory: The Constructionist View’, Annual Review of
Sociology 11: 209–29.
Teece, D., Pisano, G. and Shuen, A. (1997) ‘Dynamic Capabilities and Strategic Management’,
Strategic Management Journal 18(7): 509–33.
Weisberg, R. (1986) Creativity: Genius and Other Myths. New York: Freeman.
Weisberg, R. (1993) Creativity: Beyond the Myth of Genius. New York: Freeman.
Wernerfelt, B. (1984) ‘A Resource-Based View of the Firm,’ Strategic Management Journal 5(2):
171–80.

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009

211-226 SOQ-079969.qxd 31/7/07 8:56 PM Page 225

N I C K E R S O N E T A L . : C R E AT I N G A N D C A P T U R I N G VA L U E 225

Jackson A. Nickerson is the Frahm Family Professor of Organization and Strategy at the
John M. Olin School of Business at Washington University in St Louis. Jackson’s research
explores the antecedents and performance implications of organizational choice and how
these relationships apply to business strategy. His current interests include the problem-
solving perspective, knowledge and organizational choice, pharmaceutical manufacturing regula-
tion and performance, and R&D projects selection rules. He has published in a number of
journals including Administrative Science Quarterly, Journal of Political Economy, Strategic
Management Journal, Journal of Economics, Management and Strategy, Organization Science and
Strategic Organization. Address: Campus Box 1133, 1 Brookings Drive, St Louis, MO 63130,
USA. [email: nickerson@wustl.edu]

Brian S. Silverman is the J. R. S. Prichard and Ann Wilson Chair in Management at the
University of Toronto’s Rotman School of Management. His research focuses on the ways
that firms’ strategies and organizational structures interact to affect their performance – in
particular, their ability to access and exploit technological capabilities. His research has
appeared in numerous journals including, most recently, Administrative Science Quarterly, Journal
of Law and Economics, Management Science, Research Policy and Strategic Management Journal.
He is currently on the editorial boards of Administrative Science Quarterly, Organization Science
and Strategic Organization, and is an advisory editor for Research Policy. Address: Rotman
School of Management, University of Toronto, 105 St George Street,Toronto, ON, Canada,
M6S 2A7. [email: silverman@rotman.utoronto.ca]

Todd R. Zenger is the Robert and Barbara Frick Professor of Business Strategy at the Olin
School of Business at Washington University in St Louis. Professor Zenger’s research focuses
on organizational design and incentives, organizational boundaries and corporate strategy. His
research has explored the advantages of small firm size in crafting high-powered incentives,
the relationship between formal contracts and trust, and patterns of oscillating centralization
and decentralization within organizations. Professor Zenger’s work has appeared in Strategic
Management Journal,Administrative Science Quarterly,Academy of Management Journal,Academy of
Management Review, Organization Science and Management Science. He currently serves as an
associate editor of Management Science and on the editorial boards of Academy of Management
Review, Strategic Management Journal and Strategic Organization. Address: Campus Box 1133,
1 Brookings Drive, St Louis, MO 63130. [email: zenger@wustl.edu]

Downloaded from http://soq.sagepub.com at SAGE Publications on April 30, 2009